Good cash flow management begins with having a clear understanding on where cash enters and exits your business. It also involves keeping an eye on the long-term so that you’re not surprised by any cash flow problems, such as the following surprises.

Besides being aware of any surprises, you also need to have a plan to avoid and handle them in the first place.

1. Lack of profitability

While a lack of profit is one of the main reasons why a business fails, some business owners believe that just because they’re currently turning a profit means that they don’t have any cash flow problems. The truth is that profitable businesses of all sizes and stages can run into cash flow problems, which will ultimately force them to close their doors for good – especially when you have high business expenses and constantly reinvesting profits back into your business.

Remember, you’re only profitable after there’s revenue in your bank account and you’re paid all of your expenses.

How to avoid lack of profitably: Be on the lookout for profit-making opportunities like product markups, becoming a consultant, adding new products or services, offering freebies or discounts and constantly learning new skills.

2. Late payments

In a perfect world a client would pay his or her invoice on-time. Unfortunately, that’s not a reality. That becomes a cash flow problem when you’re banking on that income before you even received the payment. In fact, small businesses are now waiting an average of 72 days for payment of invoices. And, that can put your business in jeopardy since that means you can’t pay your bills on-time.

How to avoid late payments: Brush-up on the best practices for billing. This includes using cloud-based invoicing software, requiring a down payment, accepting multiple forms of payments, following-up with clients who haven’t paid on-time and having a plan for clients who refuse to pay the invoice.

3. The unexpected

Let’s not sugarcoat this. There will be unexpected and unanticipated costs that you’ll have to tackle. It could be anything from a key piece of equipment breaking down, a natural disaster damaging your office, responding to a negative customer complaints, having to change your business model, or losing one of your top employees. All of these can definitely impact your cash flow almost instantly.

How to avoid the unexpected: It’s impossible to predict each and every possible outcome. The best thing that you can do is take as many preventive measures as possible. For example, creating a cash flow forecast for the the next six to 12 months gives you the chance to build an emergency fund so that you can handle most of these unexpected scenarios. Other steps you could take would be to have insurance, provide amazing customer service and retain your top-performers.

4. Seasonality

For some businesses this is obvious. For example, if you’re a landscaper in the Northeast, then you can bet that once winter hits you’re not going to have a whole lot of customers contacting you. Sometimes there are seasonal fluctuations that you may not anticipate. For instance, if you’re a year-long nursery and your biggest sellers are Christmas trees, then you may run into cash problems throughout the rest of the year.

How to avoid seasonality fluctuations: The above-mentioned cash flow forecast not only could clue you in on seasonal fluctuations, it can also help you set aside enough money to pay your bills when business has dried-up. You can also diversity your business your business so that there’s consistent cash flow. A landscaper could provide a snow removal service during the winter.

5. Taxes

It doesn’t matter if you’re a monthly, quarterly or annual filer, it’s your responsibility to file the appropriate amount of taxes you owe on-time. Remember, if you don’t filed your taxes or make an error, you could be subject to to penalties, interest payments and even an audit from the IRS.

How to avoid tax problems:Mark on a calendar your tax deadlines and speak with a tax specialist. They can make sure that your taxes are in-order and can also help you find deductions. Also make sure that you have enough money set aside to pay your taxes. Although it may not be the exact dollar amount, you can look at last year’s taxes to at least get a ballpark figure.

6. Withheld funds

Investors and banks can withhold funds if your business hasn’t been able to meet expectations or your incomings are less than what was expected. This becomes a cash flow surprise when you go to secure a loan for a broken piece of equipment only to be turned down because you’re a risk.

How to avoid withheld funds:When you initially request a loan, ask for a little more, like around 25 percent, as well as a line of credit. This should help you cover any emergencies without having to ask for more money.

7. Unanticipated growth

While growth is a definitely a goal, unanticipated growth can catch you off-guard. Remember, the more you business grows the more cash you need to pay for staff, a larger property, and more products and services. Those are all expenses that can’t wait until you have more cash flow.

How to avoid unanticipated growth issues: Implementing a business system in advance gives you the chance to test out the systems that work best for your business. For example, finding invoicing software that has features like recurring billing and sending automatic payment reminders removes those time-consuming administrative tasks. Now that you’re free from those tasks, you can focus on tasks like generating more revenue to handle this rapid growth.

8. Hidden costs

No matter how prepared you are there are bound to be some hidden costs that slip through the cracks. It could be employee turnover, taxes, legal and accounting fees, repairs and replacements, permits and licenses, insurance, shrinkage, credit card/loan interest and utilities. Some of these may seem insignificant at first, but they can quickly add-up until they make a dent into your cash flow.

How to avoid hidden costs:You can’t completely avoid these hidden costs. However, I would find a mentor or fellow business owner and discuss the hidden costs that they’ve experienced. I would also sit down and create budget so that you’re aware of all of your expenses you have each month and then plan accordingly.

John Rampton is an entrepreneur, investor, online marketing guru and startup enthusiast. He is founder of the online invoicing company Due. John is best known as an entrepreneur and connector. He was recently named #2 on Top 50 Online Influencers in the World by Entrepreneur Magazine and has been one of the Top 10 Most Influential PPC Experts in the World for the past three years. He currently advises several companies in the San Francisco Bay area.

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Marnus Broodryk Shares Alternative Funding Solutions And How You Can Finance Your Growth

We’ve all heard the saying turnover is vanity, profit is sanity but cash is reality. If you want to improve cash flow, unlock growth within your business and build an asset of value, you need cash — whether that’s through organically grown cash reserves or financing solutions that suit your specific needs and growth goals.

Survey after survey shows cash flow problems as one of the biggest challenges facing South African (and global) entrepreneurs.

Most aspiring entrepreneurs say that they don’t have the capital they need to start their businesses, and blossoming businesses face the same challenge. No capital equals no growth. The good news is that there are so many ways to access capital to help you grow, from unlocking cash flow in your business to finding the right financing solution.

From traditional banks to alternative financing solutions, there are also a range of different products available to suit your needs.

Unlocking cash flow to fund yourself

Bootstrap: This means to grow the business slowly, with lean business operations. The money comes from the work the business does, for example, when you bootstrap you may take pre-orders for your product, thereby using the funds generated from the orders to actually build and deliver the product itself.

Customer Deposits: If you are in need of easy-to-access short-term working capital, one of the easiest options to raise funds is by asking your customers to pay a deposit. The deposit also provides you with a safety net when customers don’t pay.

Supplier Finance: Supplier finance, simply put, means you get the stock you need now and only pay later, usually 30 days. This is a useful form of short term finance.

Mortgage Loans: Some entrepreneurs use their home loans to finance their businesses. In doing this there are some risks and tax considerations, so make sure you do your research.

Financing your growth

If this isn’t possible, there is still hope. Globally, more and more financial institutions are offering alternative financing products for businesses. This is often easier to access than a traditional overdraft, term loan or credit card facility, because it uses other forms of security.

Asset Finance: Using the assets within your business to borrow money or get a loan. The assets act as security for the lender. Asset financing is most often used when a borrower needs a short-term cash loan or working capital.

Contract Finance: If you have a signed contract to deliver goods/services you can use that contract to obtain a loan to complete the work. The money must be used to complete said contract.

Trade Finance: Also referred to as Inventory Finance, Import Finance or Stock Finance. In simple terms this means raising finance against the stock you are buying. The stock serves as security.

Debtor Finance: A lender will ‘buy’ your unpaid invoices from you, effectively using the unpaid invoices as security for the borrowing. It is usually used to improve cash flow or working capital. In order for a lender to ‘buy’ the invoice, the work has to have been completed and the lender will charge a small percentage.

Property Finance: When financing a property for your business, the function of the building will determine what type of lender you approach. If you intend to use the building for rental income, it would be considered a bigger risk than using it for your office space. In general property finance works like a term loan, only its duration is for a maximum of ten years.

Point-of-sale Financing: If you are a retailer and use a credit card machine, then there are institutions who will provide you with a loan against the future inflow of credit card transactions. This is often an easy way to get capital and the repayments are a percentage of future sales — making it easier to repay.

If you own a good business, there’s no reason why you shouldn’t get financing. Perhaps traditional banks aren’t your solution, but know that there are other options out there. Some easier than others.

Outsmart Cash Flow Problems With The Right Financing

We’ve all heard the saying turnover is vanity, profit is sanity but cash is reality. If you want to improve cash flow, unlock growth within your business and build an asset of value, you need cash — whether that’s through organically grown cash reserves or financing solutions that suit your specific needs and growth goals.

Did you know that SMEs with access to credit can grow faster and achieve optimal size sooner, while those with limited access to finance potentially remain stagnant and smaller in size? This is according to the Finmark Trust study, released in 2016.

“There are a number of research studies that confirm the link between access to finance and business growth, showing that increased access to funding increases revenue and job growth in SMEs,” says Darlene Menzies, founder of finfind.co.za, a platform that helps SMEs access finance in South Africa.

“Access to finance improves cash flow, which enables business owners to invest in business growth,” continues Darlene. “According to FinFind’s SA SMME Access to Finance Report, business expansion is the number one reason for businesses requesting funding.”

“Working capital is essential for the day-to-day operations of a business,” agrees Shayne Burnstein, director of Swypefin, which offers alternative funding solutions. “More often than not, business owners lack sufficient working capital to meet their daily cash flow requirements or expand their operations. This can ultimately lead to the failure of the business. It’s common for a business to borrow capital and by using the basic principles of leverage, they can invest in assets that generate higher returns.”

“The reality is that growing a business requires money,” says Darlene. “Capital is needed to fund the increased expenses incurred to prepare for and facilitate increased revenue growth. Businesses that secure funding can invest in hiring more staff, secure bigger premises, expand into new markets or new products and services, purchase additional equipment, vehicles and machinery, as well as fund larger marketing budgets, amongst other things.

“Without access to finance the speed of business growth is reduced and, in many cases, the ability to achieve the potential of increased revenues, profits and job creation is jeopardised.”

According to Darlene, businesses that can secure funding and have the guarantee of working capital and cash flow availability are better positioned to employ and retain more skilled and experienced staff, to negotiate more favourable payment terms with suppliers, and to build better trading track records and improve their credit scores, all of which increase their ability to raise more finance and continue to bolster increased business growth and create more employment opportunities.

The challenge of cash flow

Karl Westvig, CEO of Retail Capital, says that more than 80% of business owners have identified seasonal cashflow as the greatest challenge facing the SME sector today. “Restrictions in cashflow inhibit plans for renovation and expansion, but mostly for stock purchasing, which has a direct knock-on effect on the profits and employment rates of the retail sector,” he says. “Giving business owners easy access to working capital allows them to get back to servicing the market while they partner with a financial provider for growth.”

“The biggest challenge that SMEs face is cash flow. Cash flow is king and that’s where finance products play a role,” agrees Linda Fröhlicht, Head of Business Banking, Sasfin. “They enable growth by giving the business owner cash to grow their business.” Of course, there’s always a balance. “There’s a cost to accessing finance, which means it’s essential that you’re accessing it to help you grow your business, rather than to service debt.

“If you borrow money to enable the growth of your business, the finance cost is actually part of the cost of your sales. But if it’s to service debt, or you can’t afford the finance, you’ve got a problem and it will only damage your business.”

According to Linda, it’s important to understand your margins, if you can sustain the cost of finance with your margins and if the product you’re looking at makes sense in terms of your business and your growth plans.

“The upside is that a financier can provide you with growth, because they’re going to give you access to cash, enabling you to grow your business. It’s a working capital solution — it’s not debt. We evaluate businesses and business owners to gain a deep understanding of the entrepreneur’s needs, first to ensure affordability and second to evaluate if the right product is being utilised to drive growth.”

Making finance work for you

Shayne Burnstein, director of Swypefin

According to FinFind’s SA SMME Access to Finance Report, the top six reasons that SME business owners request access to funding are to expand their businesses, for cash flow assistance, buying equipment, working capital, funding a contract and for property development.

There are many ways to use this capital, provided you understand your business needs and have a clear growth strategy. “We advise our clients to use the money on strategic initiatives that will ensure, and have a direct impact on, business growth and profitability, instead of personal expenses and debt management,” says Karl. “We have seen the majority of our clients seeing early profit yields (from four to six months) when funding was used for stock purchasing, renovations and expansions instead of salaries, holidays and debt repayments.”

A strategic deployment of funds can be anything from investing in the right equipment that will help you grow your business to securing early settlement discounts — all of which have the potential to boost growth in your business.

An example of early settlement discounts can be found in the retail industry. “Currently retailers are trading under very challenging conditions. With VAT and the price of petrol increasing, consumers have tightened their belts,” says Shayne. “Under these conditions suppliers are offering retailers trade discounts for COD payments. It often makes sense for them to borrow the capital to take advantage of the trade discounts, enabling the retailer to increase their margins.”

The same is true when it comes to importing goods. “Importing goods takes time,” says Linda. “From the shipment to bill of loading, three weeks on the water, turning raw materials into a finished article, selling the products, and then waiting an additional 60 days for your debtors to pay you — cash flow becomes a real challenge.

“Finance products and terms that fit in with your cash flow cycle are meaningful. In addition, if you make an upfront payment to an exporter, you can also negotiate discounts. You can then offset a portion of the discount you will receive from the supplier to finance fees.”

Growth capital can be used in any industry and any-sized business, from a dentist or doctor’s business to a clothing manufacturer. “Advancements in 3D printing technology enable dentists that historically relied on outsourcing a technician to make dental crowns, for example,” says Shayne. “This process typically takes a few weeks at a considerable cost.

By borrowing capital to purchase 3D printing equipment, the dentist can bypass the technician and make the crown in an hour, allowing them to see more patients, which would significantly increase their turnover. As a business owner, you need to critically consider what will help you grow your business: Is it new equipment, bigger premises or marketing spend? What can you invest in that will grow your turnover and your profit margins? That’s where financing makes sense.”

Karl agrees. “Any business can benefit from both alternative and traditional funding products when invested in growth initiatives,” he says, adding that businesses in seasonal trade industries in particular should investigate the alternative funding products available to them. “Because of fluctuating cashflow, seasonal businesses usually find it difficult to access traditional business financing channels. The application process can be long and arduous, whereas alternative funding allows quick access to working capital, and repayments are linked to cash flow.”

Karl does have a word of advice for business owners considering their financing options: “Don’t wait too long when thinking of applying for funding.

Once turnover has dropped too much, it affects a business’s affordability, and when funding is obtained it’s then often used as emergency funding and meeting commitments instead of investing in business profit and growth initiatives. It’s also important to deal with credible funding providers that provide consultants and assistance to the business owner with industry advice and economical insights on where the best opportunities for growth exist.”

Alternative financing solutions

Karl Westvig, CEO, Retail Capital

Studies such as the CB insights study on fintechs, the World Bank Group (2017) on Alternative Data Transforming SMME Finance and the IFC’s (2010) SME Banking Knowledge Guide show that fintechs are able to reduce many of the pain points and barriers to SME funding and importantly facilitate increased scale.

“Funding aggregators are automating funding matches, generating quality leads for funders and reducing search costs for both the providers and seekers, while online lenders are reducing approvals to less than 48 hours and funding disbursements shortly thereafter,” says Darlene.

The rise of fintechs that are able to provide alternative funding solutions is largely thanks to innovative tech advancements and algorithms that can evaluate businesses based purely on multiple data points.

“By automating processes and gaining more insight into available data, fintech companies are able to make more informed decisions regarding the credit profile of clients,” says Shayne. “We have developed an algorithm that looks at your previous 12 months’ turnover in order to determine an amount of your future sales that we can advance to you,” he continues, explaining how Swypefin’s product works.

“Our repayments are based on a percentage of your turnover, which allows you the flexibility to pay less in the months in which your cash flow is constrained and pay more in your busier months. We do not tie up your assets as collateral. Our fee is fixed, transparent and pre-agreed upfront. You will never be liable to pay more than what is agreed upon. If the advance is settled early we offer a pro rata refund on the fixed fee depending on when settlement takes place.”

Positive cash flow and smart financing solutions

Linda Frohlich, Head of Business Banking, Sasfin

Ultimately, finance should support your business and help you grow. With that in mind, Linda unpacks when you shouldn’t be accessing finance, and how to ensure you remain on the path to growth rather than bad debt and business failure.

“One of the biggest issues we see are companies that overtrade and get themselves stuck in a debt cycle,” she explains. “In simple terms, a business that is overtrading has orders, but not the infrastructure to meet those orders. If there’s a clear growth strategy in place matched with the right financing vehicles, this growth can be planned, controlled and executed, but many entrepreneurs want to run before they can walk.

“When this happens, the business will invest in expensive fixed assets in order to meet orders, and then the necessary orders don’t come in, or something happens to disrupt the business. Now the business is playing catch-up, and the business owner needs finance to cover debt.”

According to Linda, the biggest cause of over-trading is failing to plan cash flow. “This is one of the first questions we ask: Do you have a strategy in place and a cash flow projection? Not just for this year, but this month, week, and even on a day-by-day basis.

Another key error many business owners make is using the deposit from one contract to kick start another contract. “There’s a domino effect when this happens. The business very quickly gets totally out of kilter, and the owner never quite manages to get on top of his finances. To avoid this trap, concentrate on finishing the job at hand. Ensure that you allocate the funds that you get to where you lent the money from — no matter what.

“This goes back to managing cash flow. Business owners believe that finding a second project from the first (when it’s not finished and the money isn’t in the bank) will help them grow. Instead, it just kills their business.

“Cash is king and never borrowing money can cap your growth, but you need to understand the difference between healthy debt and bad debt.”

Financing property

Suraj Lallchand, Director at Fedgroup Ventures, a division of Fedgroup.

While the solutions for cash flow assistance, buying equipment, working capital and funding a contract are similar to each other, property development is specific.

Done correctly, investing in the commercial property from which you run your business can make strong financial sense and result in savings on your bottom line.

“Many business owners who own their premises have two separate companies,” explains Suraj Lallchand, director at Fedgroup Ventures, a division of Fedgroup. “The first is the original company that actually runs the operations, and the second is a ‘prop co’ that owns the property.”

The reasons for this are simple: There are tax benefits, it opens a second income stream, and it keeps the two entities separate, allowing the business owner to one day sell the business while maintaining the property portfolio they have built up. In many cases, if the business is sold but remains in the premises, as the property owner they will continue to draw rental fees from the business.

“It’s a simple process,” explains Suraj. “You would put the property into the prop co, take a loan against the property, and charge rent to the operations company. This then becomes a taxable deduction for the operational company, and the interest you pay on the loan for the building is deductible for the prop co. As a result, you bring your taxable income down to a minimal amount. We see many companies that would rather purchase their own properties and take the tax deductions than continue to rent.”

The key to owning your own commercial property is whether or not the operations company can afford the rental and has strong prospects for the future. “If you can’t occupy the building and you don’t find a tenant, the prop co will end up defaulting on its loan and losing the property,” he adds.

“We always do our due diligence on the borrower and the property in question,” agrees Rick de Sousa, Head of Commercial Property Finance at Fedgroup. “The security we are lending against is determined by the value of the property as well as the owner’s ability to service the loan. If the owner of the business is purchasing the property, then the business’s stability and projected income is an important factor for us to consider.”

According to Rick, there is a completely different level of responsibility involved when you purchase premises compared to rent. “It’s a good example of risk and return,” he says. “Your risks increase, and it becomes your responsibility to ensure the building is maintained, rates and taxes are being paid, security, insurance, health and safety — you no longer have a landlord taking care of any of these things — but the returns should be commensurate with that risk.”

Rick’s advice is that you ensure the yield of the property makes sense. “Property has proven to outperform inflation. It’s generally in the high teens. In addition, commercial property is pretty predictable when it comes to rentals as well. You can bank on a yearly increase of 6% to 8%. This all aligns with whether the property is well managed though, and if you’re the landlord and the tenant, whether your business can continue to pay the rentals for the foreseeable future.”

From a property owner’s perspective, Fedgroup’s terms are flexible. “We can lend up to 75% of the asset value,” says Rick. “We also give interest-only terms. This means you can choose to only pay the interest, and once the business has grown and your revenues have increased, you can elect to start paying capital, or you can continue to only pay your interest and see returns once the property has appreciated and is sold. Those returns can then be invested in the next property.”

Over and above the flexible terms and the fact that Fedgroup does not prescribe how funds are allocated once the loan has been granted, Rick believes their clients benefit from the property experience of the division’s team and partners. “We can talk property with them, which is extremely valuable when making such a big decision.”

Property portfolios

“Many businesses keep the company and property portfolio separate. There are tax benefits, it opens a second income stream, and it keeps the two entities separate, allowing the business owner to one day sell the business while maintaining the property portfolio they have built up.” — Suraj Lallchand, Director at Fedgroup Ventures, a division of Fedgroup.

Growth through property

“Owning commercial property is a good example of risk and return. Your risks increase, but the returns should be commensurate with that risk.” — Rick de Sousa, Head of Commercial Property Finance at Fedgroup.

Did you know that SMEs with access to credit can grow faster and achieve optimal size sooner, while those with limited access to finance potentially remain stagnant and smaller in size? This is according to the Finmark Trust study, released in 2016. There are a number of research studies that confirm the link between access to finance and business growth, showing that increased access to funding increases revenue and job growth in SMEs.

Access to finance improves cash flow, which enables business owners to invest in business growth. According to FinFind’s SA SMME Access to Finance Report, business expansion is the number one reason for businesses requesting funding.

“Working capital is essential for the day-to-day operations of a business,” says Shayne Burnstein, director of Swypefin, which offers alternative funding solutions.

“More often than not, business owners lack sufficient working capital to meet their daily cash flow requirements or expand their operations. This can ultimately lead to the failure of the business. It’s common for a business to borrow capital and by using the basic principles of leverage, they can invest in assets that generate higher returns.”

The reality is that growing a business requires money. Capital is needed to fund the increased expenses incurred to prepare for and facilitate increased revenue growth. Businesses that secure funding can invest in hiring more staff, secure bigger premises, expand into new markets or new products and services, purchase additional equipment, vehicles and machinery, as well as fund larger marketing budgets, amongst other things.

Without access to finance the speed of business growth is reduced and, in many cases, the ability to achieve the potential of increased revenues, profits and job creation is jeopardised.

Making finance work for you

According to FinFind’s SA SMME Access to Finance Report, the top six reasons that SME business owners request access to funding are to expand their businesses, for cash flow assistance, buying equipment, working capital, funding a contract and for property development.

There are many ways to use this capital, provided you understand your business needs and have a clear growth strategy. A strategic deployment of funds can be anything from investing in the right equipment that will help you grow your business to securing early settlement discounts — all of which have the potential to boost growth in your business.

An example of early settlement discounts can be found in the retail industry. “Currently retailers are trading under very challenging conditions. With VAT and the price of petrol increasing, consumers have tightened their belts,” says Shayne. “Under these conditions suppliers are offering retailers trade discounts for COD payments. It often makes sense for them to borrow the capital to take advantage of the trade discounts, enabling the retailer to increase their margins.”

Growth capital can be used in any industry and any-sized business, from a dentist or doctor’s business to a clothing manufacturer. “Advancements in 3D printing technology enable dentists that historically relied on outsourcing a technician to make dental crowns, for example,” says Shayne.

“This process typically takes a few weeks at a considerable cost. By borrowing capital to purchase 3D printing equipment, the dentist can bypass the technician and make the crown in an hour, allowing them to see more patients, which would significantly increase their turnover. As a business owner, you need to critically consider what will help you grow your business: Is it new equipment, bigger premises or marketing spend? What can you invest in that will grow your turnover and your profit margins? That’s where financing makes sense.”

Alternative financing solutions

Studies such as the CB insights study on fintechs, the World Bank Group (2017) on Alternative Data Transforming SMME Finance and the IFC’s (2010) SME Banking Knowledge Guide show that fintechs are able to reduce many of the pain points and barriers to SME funding and importantly facilitate increased scale.

“By automating processes and gaining more insight into available data, fintech companies are able to make more informed decisions regarding the credit profile of clients,” says Shayne. “We have developed an algorithm that looks at your previous 12 months’ turnover in order to determine an amount of your future sales that we can advance to you,” he continues, explaining how Swypefin’s product works.

“Our repayments are based on a percentage of your turnover, which allows you the flexibility to pay less in the months in which your cash flow is constrained and pay more in your busier months. We do not tie up your assets as collateral. Our fee is fixed, transparent and pre-agreed upfront. You will never be liable to pay more than what is agreed upon. If the advance is settled early we offer a pro rata refund on the fixed fee depending on when settlement takes place.”